The goal of this paper was to propose a trade model for the determination of the net share of international fragmentation in the welfare gains of trade. To do so, we relied upon value-added exports as the variable of interest instead of gross exports. It allowed us to highlight the macroeconomic cost of fragmentation, a critical variable for the computation of this net share.
Our model predicts that the net share of international fragmentation in the welfare gains of trade is not as high as one could expect, at least in comparison to the gross share that could be inferred from a classical model. It represents only 22% on average of the gains of trade. As the model allows us to deduct from the gross welfare loss that would imply the shutdown of international fragmentation the cost of fragmentation that would not be supported anymore in its absence, the net welfare loss is thus reduced.
We also show that using our framework to derive the welfare gains of trade in comparison to a standard trade model based upon gross exports give different results. This is due as explained Alexander (2017) to the implicit assumption made by standard trade models that the share of intermediate goods sourced from a given origin country in the total demand of intermediate goods of a given destination country is equivalent to the share of final goods sourced from this origin country in the total demand of final goods of the destination country. Specifically, we show that the reduction in real wage that a move to autarky would provoke is lower using our approach than the traditional one for upstream countries, and higher for downstream countries and countries that are less open in terms of the imports in value-added penetration ratio. The gains from trade are thus understated by the classical model for this last category even if they remain way lower than the gains associated to the more open countries with our model.
Finally, we show that reducing the level of a country’s bilateral trade costs with its trading partners does not necessarily imply more forward participation in the global supply chain.
In fact, unless the reduction in trade costs affects more the indirectly exported flows than the directly exported ones, the increase in exports would be biased towards the latter, which implies a weaker forward participation in relative terms to the global production network. Backward integration, however, undoubtedly increase, and the countries are closer to the final consumers than before. This result has interesting implications in term of trade policies since increasing the participation in the global supply chain is a key concern for many countries.
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